Question

Julius is an electrician. Julius and his wife are cash basis taxpayers and file a joint return. Julius wired a new house for Coreen and billed her $15,000. Coreen paid Julius $10,000 and refused to pay the remainder of the bill, claiming the fee to be exorbitant. Julius took Coreen to small claims court for the unpaid amount and was awarded a $2,000 judgment. Julius was never able to collect the judgment or the remainder of the bill from Coreen. What amount of loss may Julius deduct in the current year?

Answer 1

Julius may deduct the $5,000 remainder of the bill as a loss in the current year. The $2,000 judgment awarded to him is not deductible.

Step-by-step explanation:

Julius may deduct the amount of loss that he was unable to collect from Coreen in the current year. In this case, Julius billed Coreen $15,000 for wiring the new house, but she only paid $10,000, leaving a remainder of $5,000. Julius took Coreen to small claims court and was awarded a judgment of $2,000, which he was unable to collect. Therefore, Julius may deduct the $5,000 remainder of the bill as a loss in the current year. The $2,000 judgment awarded to him is not deductible, as it is considered a recovery of part of the bill.